Self-Employed or Running a Side Hustle
Being self-employed opens up a set of retirement and tax strategies that W-2 employees simply don't have access to. Many self-employed people never use the options available to them.
Key Takeaways
- •A Solo 401(k) allows contributions up to $72,000/year - far beyond the standard $24,500 limit
- •SEP-IRA allows contributions of up to 25% of net self-employment income
- •Self-employed individuals can deduct health insurance premiums and half of self-employment tax
- •Quarterly estimated tax payments are required - missing them triggers IRS penalties
- •Separating business and personal finances is important from day one
Solo 401(k): High Contribution Limits for the Self-Employed
A Solo 401(k) is available to self-employed individuals with no full-time employees other than a spouse. It allows both employee and employer contributions, for a combined limit of $72,000 in 2026.
Employee contribution: up to $24,500 (or $32,500 if 50+, with the $8,000 catch-up). Employer contribution: up to 25% of net self-employment income.
Run the numbers:
As both employee AND employer
Your Solo 401(k) Breakdown
Employee Contribution
Your "salary deferral"
$24,500
Employer Contribution
25% of adjusted income
$27,705
Total Annual Contribution
2026 limit: $72,000
$52,205
$16,706
Annual Tax Saved
$417,640
Lifetime Tax Saved
$3.30M
@ 7% Return
vs SEP IRA: Solo 401(k) lets you contribute as employee + employer, sheltering up to 3x more than SEP IRA at lower incomes!
SEP-IRA: Simpler, Less Administrative Overhead
A SEP-IRA allows contributions of up to 25% of net self-employment income, up to $72,000 (2026). It's easier to set up than a Solo 401(k) - no annual IRS filings required until balances exceed $250,000.
Quarterly Estimated Taxes: Avoid the Penalty
Self-employed individuals are responsible for paying estimated taxes quarterly. A simple approach: set aside 25-30% of every invoice payment into a dedicated tax savings account and pay quarterly.
Sources
- Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
- Internal Revenue Service, Publication 505
Tax Withholding and Estimated Tax (estimated-tax and safe-harbor rules)
Educational content only. Not personalized financial advice. Strategies discussed apply to different situations - consult a financial professional before making decisions specific to your circumstances.